Economic Stabilization Fund and “Main Street” Lending Program to Provide Assistance for Larger Businesses and Nonprofit Organizations

This is in addition to the forgivable loans through the Paycheck Protection Program (PPP) and the expanded Disaster Loan Program offered to small businesses.

Out of this amount, the Treasury Department is required to seek the implementation of a program that provides financing to banks and other lenders that make direct loans to certain eligible businesses, including nonprofit organizations, with between 500 and 10,000 employees.

The Act requires that the loans administered under this program feature an annual rate of interest not greater than 2% per annum, and allow for at least a 6-month deferral of payments of principal and interest after the loan date. Unlike debt issuable under the PPP, the loans are not forgivable.

In order to receive one of these loans, in addition to becoming subject to Treasury Department oversight, the eligible business or nonprofit organization will be required to make certain good-faith certifications, such as that:

• • The uncertainty of economic conditions at the time of the loan application makes the loan request necessary to support the borrower’s ongoing operations.
  • The loan proceeds will be used to retain at least 90% of the borrower’s workforce, at full compensation and benefits, until September 30, 2020.
  • The borrower intends to restore not less than 90% of its workforce that existed on February 1, 2020, and to restore all compensation and benefits to its workers no later than 4 months after the termination of the current public health emergency declared by the Secretary of Health and Human Services.
  • The borrower is an entity created, organized and domiciled in the United States with significant operations and a majority of its employees located in the United States.
  • The borrower is not subject to a bankruptcy proceeding.
  • The borrower will not pay dividends or repurchase nationally listed equity securities while the loan is outstanding (except as required under a contractual obligation in place prior to the enactment of the Act).
  • The borrower will not outsource or offshore jobs during the loan term and for 2 years after completing repayment of the loan.
  • The borrower will not abrogate any collective bargaining agreements (during the loan term and for 2 years following the completion of payment) and will remain neutral in any union organizing effort (during the loan term).
  • An agreement to freeze officer and employee compensation for those making in excess of $425,000 during the loan term and for 1 year after the loan is no longer outstanding.

On March 23, 2020, the Federal Reserve Board announced that it is developing the Main Street Business Lending Program to support lending to eligible small-and-medium-sized businesses that would not qualify for SBA programs due to size limits, but are also facing liquidity constraints.

On April 9, 2020, the Fed provided additional details on the Main Street program, indicating that it will utilize $75 billion from the Treasury Department’s appropriations noted above to establish a facility that will purchase up to $600 billion of newly issued and existing loans from eligible lenders that provide debt financing to small and mid-size businesses, defined as concerns in good standing prior to the COVID-19 crisis that employ up to 10,000 workers or with revenues of less than $2.5 billion. Key features of these loans are as follows:

• • 4-year maturity, with amortization of principal and interest deferred for 1 year.
  • Interest rates on direct loans will not exceed 2% per annum, but will be based on an adjustable-rate equal to the Secured Overnight Financing Rate + 250-400 basis points.
  • Minimum loan size of $1 million.
  • For new loans, maximum loan size equal to the lesser of (1) $25 million or (2) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed 4 x 2019 EBITDA (loan amounts are larger for those borrowers looking to expand existing facilities).
  • Prepayment permitted without penalty.

The Fed’s term sheet for the Main Street loans issued on April 9, 2020 is available here. The Main Street loans will be directly administered through private banking institutions which will sell 95% participations in the loans to a special purpose vehicle created by the Fed, with lenders retaining 5% of the loans.

In order to obtain one of these loans, in addition to making the certifications required by the Treasury Department noted above, borrowers will need to make a series of attestations as part of the loan application, including:

• • Proceeds will not be used to repay or refinance existing debt.
  • The borrower requires the financing due to exigent circumstances presented by COVID-19, and that it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
  • The borrower must follow the compensation, stock repurchase and capital distribution restrictions that apply to the direct loan programs under the CARES Act (see the Treasury Certifications noted above).

The application process for the Main Street lending program has yet to be established, although we anticipate the process will be streamlined in a fashion similar to the PPP. We will continue to monitor the development and availability of this program and will provide further guidance to you as it becomes available.

The SBA Focus Group of the COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.

Author Justin Csik is an associate in the Corporate & Securities Department at Klehr Harrison.